 Comment & Analysis |
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Thursday January 10, 04:24 PM
European govt bonds lower after hawkish Trichet comments, BoE holds rates
LONDON (Thomson Financial) - European government bonds were lower following hawkish comments from European Central Bank president Jean-Claude Trichet and after the Bank of England disappointed UK gilt markets by leaving interest rates unchanged.
As had been fully anticipated, the European Central Bank left interest rates unchanged at 4.00 pct. Attention focused therefore on Trichet's accompanying press conference, where he continued to suggest that a rate hike is still more likely than a cut.
'Today's press conference sees the ECB up its now familiar hawkish ante with the Bank threatening to act 'preemptively' to stem wage pressures,' said Richard McGuire at RBC Capital Markets.
Though Trichet said the risks to the growth outlook are still 'tilted to the downside', he expressed far greater concern about inflation.
Recent data 'fully confirm' the upside risks to the inflation outlook, he said, adding that inflation is expected to remain 'significantly' above 2 pct in the coming months. Trichet was particularly concerned about the possibility of second round effects from higher wage deals.
'While we expect the ECB to remain at the sidelines in the coming months, the clear possibility of generous settlements in the current German pay round means the near term risk is skewed toward higher rather than lower euro zone policy rates,' McGuire said.
Over in the UK meanwhile, gilts were also lower, with short sterling futures -- a gauge of interest rate expectations -- particularly weak after the Bank of England left interest rates on hold at 5.50 pct.
Though the decision had been broadly expected, with 28 out of 36 economists polled by Thomson Financial News forecasting no change, there had been a growing feeling in the market that the central bank might opt for a quarter point cut.
'The MPC (A050540.KQ - news) kept the Bank rate on hold at 5.5 pct today, in line with economists' predictions, but disappointing some markets,' said Philip Shaw at Investec (LSE: INVP.L - news) . He noted that since yesterday the yield curve had been pricing in a 60 pct chance of a 25 basis point cut.
However, it is likely that the decision was a close call and a cut next month is widely expected.
'Today's unchanged decision suggests a strong chance of a second 25 basis point cut by the BoE to 5.25 pct in February given data over the coming month is likely to show the UK economy continuing to falter,' said Matthew Sharratt at the Bank of America.
At Yield Change on
1603 GMT pct previous close
March euribor future (Liffe) 95.47 dn 0.03
June euribor future (Liffe) 95.62 dn 0.04
GERMANY
March bund future (Eurex) 115.26 dn 0.06
4.00 pct Jan 2018 govt bond 99.24 4.09 dn 0.09
FRANCE
4.25 pct Oct 2017 govt bond 100.36 4.20 dn 0.05
ITALY
5.25 pct Feb 2018 govt bond 100.79 4.45 dn 0.14
UK
March gilt future 111.06 dn 0.08
5.00 pct March 2018 govt bond 104.83 4.40 dn 0.10
March short sterling future 94.56 dn 0.06
June short sterling future 94.89 up 0.04
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